Global chaos has become a permanent guest in your portfolio. This strategist says Big Tech and emerging markets are now essentials.

Nuveen global strategist sees investors today as dangerously complacent about the Iran war

Markets are still assuming a gradual reopening of the Strait of Hormuz and a de-escalation of the regional conflict, but a Nuveen strategist warns investors are baking this into portfolios at their peril.

Investor complacency is increasingly evident as the Iran war becomes normalized by markets, which are pricing in a base case of partial resolution and a gradual resumption of energy flows.

That's according to Laura Cooper, global investment strategist at Nuveen Asset Management responsible for overseeing $1.4 trillion in assets. It's a trend she sees as dangerous. "Further attacks on Gulf energy infrastructure, or escalation that draws in additional regional actors, remain underpriced," she told MarketWatch in an interview on Wednesday.

Laura Cooper thinks political change was moving faster than markets were - until very recently

Outcomes aren't symmetric, and Cooper emphasized that geopolitics are now shaping those outcomes, rather than a factor portfolios can price at the margin.

The London-based strategist identified three distinct fault lines that undermine some of the more optimistic approaches prevalent as a cease-fire was announced in the Middle East.

First, geopolitical risk has become structural rather than episodic.

Second, Europe was insufficiently prepared for the new transactionalism of the second Donald Trump administration in the U.S. and is entering an era of punitively expensive energy, just when its plans for structural hegemony and rearmament were developing.

Third, central banks have their hands tied because higher inflation expectations make the usual tool for tackling slower growth - chiefly easier monetary policy - can't be applied without exacerbating the situation.

So how should investors position themselves for this new, problematic epoch? Cooper made the case for geographical diversification, scenario weighting and becoming increasingly selective even within asset classes. Given the heightened inflation expectations, Nuveen evinces a clear preference for floating-rate rather than fixed-rate credit instruments, for energy and upstream assets across equities, and for hard assets and real-return profiles.

'Investors are not positioned for a world in which assumptions built over decades - institutional credibility, alliance durability and the limits of political shock - would be tested simultaneously.'Laura Cooper, Nuveen

Despite some of the unwelcome publicity private credit has attracted of late, Nuveen is positive toward some pockets of the asset class. Cooper said Nuveen is being especially selective about individual credits, choice of manager and covenant protection, but attracted by the much higher yields potentially on offer.

The Brent (BRN00) forecast that Nuveen's portfolio managers plug into their models is $80 per barrel, but Cooper stressed that there was upside risk to that number and that this was impacting how the allocation team looks at asset classes. For example, Nuveen has recently revised its rate outlook for the U.S. and is now expecting just one interest-rate cut in 2026, with the second easing it had predicted now being pushed back to 2027.

Key crude-oil prices. Nuveen has an $80-per-barrel average for Brent in its forecasts for 2026. It assumes a steep decline from where prices are now - and therein lies the risk.

Meanwhile, Cooper believes the European Central Bank is the one most likely to be forced into a rate hike in 2026, she said. Europe is more vulnerable to higher inflation due to its energy dependency versus the U.S., now a net exporter of petroleum products. In general, Nuveen finds the U.S. economy more resilient than others, not just because of its energy independence but also because of the defensive nature of its technology sector.

Cooper is skeptical Europe can deliver the 9% earnings growth the consensus expects, and believes, she said, that analysts are too optimistic about the knock-on effects of the crisis to growth assumptions.

The defensive and more predictable nature of the earnings growth in the U.S. technology and AI sectors MAGS explains why Nuveen recommends an overweight position in U.S. large caps.

However, the team barbells its equity exposure (barbelling means offsetting riskier bets with more secure ones in portfolio weightings) with overweight calls on Japan (NIY00) and emerging markets EEM. Cooper also finds the yields on 10-year gilts BX:TMBMKGB-10Y interesting, she said, especially if inflationary effects prove less dramatic than presently feared.

Within emerging markets, Cooper is constructive on South Korea EWY from the tech perspective, and Brazil EWZ, a net exporter of commodities, she told MarketWatch. From a fixed-income perspective, Cooper said she favors sovereigns where strong external balances and positive carry can be useful, especially when safe-haven assumptions, chiefly the dollar DXY, are being challenged. She added that there's a "blurring of lines between emerging and developed markets underway."

"Investors are not positioned for a world in which assumptions built over decades - institutional credibility, alliance durability and the limits of political shock - would be tested simultaneously," Cooper observed. Her message: that investors need to start adjusting, and incorporating these new realities now.

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.